"What’s your business worth?" is a difficult question to answer, especially for small businesses. In fact, according to a 2014 IBISWorld report on "Business Valuation Firms in the U.S.," 98 percent of business owners don’t know the value of their company; those that do tend to be large companies that have the finances and resources available to them to find out. For the remaining 200 million small businesses in the US, valuing their business seems to be both impractical and out of reach.
Business valuation is difficult for two main reasons: time and cost. In conducting research for our book What's Your Business Worth?: The Entrepreneur and Advisor's Guide to Discovering, Monitoring, and Optimizing Business Valuation, Daniel Priestly, Scott Gabehart and I found that offline valuations can take between four to six weeks to complete and can cost upwards of $5,000. This amount of money and the resources that must be funneled into the process are often too costly for a small business to take on, and as such, valuation doesn’t become high on the list of priorities.
Being unaware of valuation information means that business owners do not have sufficient insight into key areas of optimal knowledge, such as the right capital structure for the business, and the proper insurance coverage needed to protect it. This in turn can cost them thousands of dollars each year that they simply cannot afford to lose. In fact, the 2013 Global Entrepreneurship Monitor Report, produced by Babson College and other universities, found that the top reasons for discontinuing a business in the U.S. were problems obtaining financing -- an issue that can be directly related to poor valuation knowledge.
Keeping up-to-date on their business valuation helps owners to make important decisions for their company, including when to raise capital and how to ask for capital or a loan from investors or banks, understanding when to exit and their exit strategy and when to purchase another business in efforts to strengthen their own offering. An inaccurate business valuation can cost a business millions, either by the owner selling it for too little or by paying too much for a company they’re acquiring.
When it comes to knowing how a business valuation strengthens a business, knowledge is always power. It gives business owners the ability to remain ahead of their competitors and potential purchasers, keeping owners well prepared for any situation or offer that comes their way.
When they understand their business value, owners are able to improve their performance on all fronts and become more competitive in their respective market.
Malahat Valuation Group performs business valuation for business owners and their advisors, to help with strategy, exit and succession planning. Let us provide you with an independent value perspective to help you gain an edge on your competition.
Malahat Valuation Group